Growing Problems in the Bond Market
As autumn arrives on the US / Canadian border line, with its shorted days, I’m becoming more pessimistic on the prospects of the Dow Jones seeing any new all-time highs in the foreseeable future. It isn’t the season’s lower temperatures making my market outlook so melancholy. Actually, I enjoy autumn’s earlier evenings, and longer nights, drinking hot tea or coffee as I stare into a comforting fireplace.
My problem with being optimistic on the stock market in September 2026 is, I believe rising bond yields are approaching their critical, but still unknown thresholds. There is a point where today’s rising yields, will trigger something very unpleasant on Wall Street. But we’ve been here before, as seen in some of my charts later in this week’s article.
But for now, let’s look at the Dow Jones Bear’s Eye View chart below, where all new all-time highs are converted into a 0% (called BEV Zeros), and closes below these BEV Zeros, register as a negative percentage claw-back from their last all-time high.
Why? Because that is how Mr Bear sees the Dow Jones. All-time highs are only Big Fat Zeros to him, and large negative percentage declines from those BEV Zeros, are sources of joy for the big furry fellow.
So, what is there to see below. This week the Dow Jones closed inside scoring position, within 5% from its last all-time high. But I note it closed below scoring position on Wednesday and Thursday. Nothing really wrong with that from a bull’s point of view. As seen below, since November 2023, the Dow Jones has closed below scoring position a few times, to then rebound to a new BEV Zero.
So, why not this time? Well, maybe it will, and then maybe it won’t. Dow Jones closing above 60K by Christmas? Considering that possibility is so July 2026, a time before bond yields were spiking upward to where they are today. Two months can be a long time in the market.
Above is the Dow Jones plotted in the dollars it is published in, with its 52Wk High & Low Lines. The two charts above are based on the same data; the Dow Jones from 01 October 2022 to this week’s close. However, the upper chart is in the Bear’s Eye View, while the bottom chart is in dollars. These two views of the Dow Jones complement each other.
Below is the Dow Jones in daily bars. For the bulls, its critical price level seems to be 51,500. Twice in the pasted month it closed below it, and twice it bounced back up. Will there be a third breach below 51,500 in the days and weeks to come? I can’t say with certainty if it will, or won’t. But I’m thinking the Dow Jones will be trading below 50K before November, should bond yields continue rising in October, as they have in September.
In my table below, listing the BEV values for the major market indexes I follow, the NASDAQ 100 & Composite indexes saw some BEV Zeros this week, on Monday, and then again on Tuesday. No doubt the AI stocks, trading at extreme bubble valuations are responsible for that. But that was it, as far as new all-time highs went this week, with the data I maintain.
For the Dow Jones (#9 / table below), it closed below scoring position on Wednesday and Thursday, which are BEVs of -5.00%, or lower. The week also closed with only nine of the nineteen indexes closing inside of scoring position. It’s been a while since we’ve seen so few indexes closing the week in scoring position. The Average BEV (#17) went double-digits on September 14th, last week. And indexes with double-digit BEV values are beginning to pile up at the bottom of this table.
My performance tables are above. Some of these indexes were up from last week, others down. Nothing dramatic is on display above, so let’s move on.
What is really bother me about this bull market, and the American economy in general, are seen in the charts below,
- US National Debt is now over 40 trillion dollars,
- US Currency in Circulation (CinC) continues to rise.
These factors have bothered me for a long time, as my long-time readers know. But the difference between now, and then, is I believe these issues of rising government debt, and unchecked currency creation, are becoming more relevant to the market as a whole.
In the late 1970s and early 1980s, as the US National Debt was approaching one trillion dollars, the news media once report the rising national debt with regularity, as T-bond yields increased into double-digits. Now, forty-six years later, is the media once again becoming aware of the danger of massive government debt, and rising T-bond yields? I expect sometime in the coming year, that will be exactly so.
The chart above, plotting the growth in CinC for the past eight decades, is an obscenity! In 1952, CinC was only $30 billion dollars. At this week’s close, it was $2,482 billion dollars. This is an increase of dollars in circulation by a factor of 82.7.
When they took the dollar off its $35 gold peg in August 1971 (Red Star above), they promised doing so would not be inflationary. They lied, and they knew they were lying. Every time I hear some “Market Expert” or economist say the Federal Reserve is “fighting inflation,” by doing this, or doing that, I have to laugh about how such total ignorance (or dishonesty?) is passed on to the general public.
This chart of CinC going back to 1952, is a chart that will never be seen on television. But I’m proud to post it, data published weekly in Barron’s for many decades.
So far this week, I’ve spoken much about rising bond yields. So maybe I should produce some graphics proving my point, such as the table below, listing yields going back to last May. I’ve highlighted the lows of the range in orange, the highs in green. This week closed with each yield at their highs of the past four months.
The row listing the Yield Deltas, gives the percentage increases from the range’s highs and lows. Seeing these yields increase by at least a half of a percentage point in only four months, is not good for the financial system.
Mortgage rates closed the week at over 7%. Can mortgage rates rise above 8%, and not see another crash in single family home valuations, as we saw in 2007-2009? If these trends continue, we’ll soon find out.
If you are wondering why these yields are now spiking upwards, take a second look at the charts above.
And it’s not just US bond yields rising. Japanese Government Bonds bottomed, their yields going negative in September 2019, but have been rising ever since. These Japanese bond’s rising yields may be the most bearish factor for the immediate future, as they strongly suggest the “Japanese Carry Trade” will have to unwind.
What’s that? Large financial institutions were borrowing money in yen, as it was cheap to do so, to then purchase dollar assets, yielding more than the rates on their yen debts. Borrow yen at something below 2%, to then be invested in dollars yielding something above 4%. It’s like free money. The total sums of yen and dollar assets involved in this yen carry trade are huge.
However, this yen carry trade works only as long as bond yields are stable, with rates of the yen loans, below the percentage payout in dollars. Once that is no longer so, the dollar assets must be liquidated, to pay back the loans in yen, or the profits from these leveraged positions, soon become leveraged losses.
How many billions (trillions?) of dollars in assets will have to liquidated, by the big Wall Street banks, insurance companies, and pension funds, when this carry trade become unviable? One of these days, this ingenious scam is going to end, and it most likely will end with a very disorderly market on Wall Street.
Next is the most bearish chart I have for this week. A chart plotting long-term T-bond yields and the FOMC’s Fed Funds Rate.
As mentioned last week, the FOMC declared they were going to increase their Fed Funds Rate. But relative to the yield on the long T-bond’s yield, increasing, or lowering the Fed Funds Rate can have a huge impact on the economy and financial markets.
When the Fed Funds Rate (Blue Plot below) is BELOW the yield on the long T-bond (Red Plot), “monetary policy is loose,” which “stimulates” the economy and financial markets. When the Fed Funds Rate is ABOVE the yield on the long T-bond, “monetary policy is tight,” resulting in a brake on the economy and financial markets. When the Red Fed Funds Rate is above the yield for the long T-bond, it’s called; inverting the yield curve.
The extremes in tight “monetary policy,” occurred in the 1970s & early 1980s below. Following the termination of the dollar’s $35 gold peg, consumer price inflation soon approached, to then break above 10% for many years. Look at how far the FOMC was willing to increase their Fed Funds Rate, above long T-bond yields before 1982. This was when they were “fighting inflation,” because their “liquidity” was flowing into consumer prices, and no one likes that.
But following 1982, the Federal Reserve’s “liquidity” began flowing into financial asset valuations, resulting in bull markets (inflationary bubbles) somewhere on Wall Street. These rising prices in the stock and bond markets were still monetary inflation. But inflation in the stock market, and real estate were declared as “economic growth” by economists. And “economic growth” is something everyone loved.
Note following 1982, the FOMC still inverted the yield curve, but only by a tiny amount, compared to yield curve inversions prior to 1982. This obvious change in “monetary policy” was because, the idiots at the FOMC were now fighting deflation in the financial asset valuations they were inflating. And every time the FOMC inverted the yield curve after 1982, even by a tiny amount, the inflationary bubble they inflated somewhere on Wall Street, when bust in a big way.
Look at the post 1982, big market declines on Wall Street;
- Leverage Buyout bull market bust (1987),
- NASDAQ High Tech bull market bust (2000),
- Sub-Prime Mortgage bull market bust (2007),
- March 2020 Flash Crash (March 2020),
each was preceded by the FOMC inverting the yield curve in the chart below. And now, for the fifth time since 1982, these idiots at the FOMC have once again inverted the yield curve.
I know some of my readers will be aware of the fact that as of today, the yield curve is not inverted. And the #5 yield inversion seen above, is now a historical fact, from two years ago. Arguably; not a current dilemma for the market. But the ways of “monetary policy” are not an exact science.
Instantaneous reactions between it, and the financial markets are not the usual order of things on Wall Street. Delays must be expected. Though I admit, a two-year delay following a yield inversion (#5), and a significant market reaction to it, seems excessive. Still, there it is in the chart above. And I expect it will have consequences in the financial markets in the not to distance future.
Next is my chart on a 30Yr T-bond issued in February 2020, based on weekly closing data. It’s been trading for the past six years, so technically speaking, it is no longer a 30Yr T-bond. But it tells a story of woe, for anyone who bought long term Treasury debt at the top of a bull market, when this bond’s current yield declined to 1.19% in August 2020.
This week, this T-bond’s current yield increased to 5.61%, as its valuation, once 120 in August 2020, is now at 53.09. A decline of 55.75% since the August 2020 bull market top in the Treasury debt market.
This T-bond’s decline in valuation, is deeper than the 53.78% decline in the Dow Jones saw, during the panic selling of the sub-prime mortgage debacle of 2007-2009. Investing money in the Treasury market, isn’t supposed to do that. But there it is below!
One more chart on the bond market, a chart plotting the price of the Dow Jones Corporate Bond Index. Below we see what the March 2020 Flash Crash did to the corporate bond market. From March 4th, to March 18th, this bond index deflated by 15% in only ten trading sessions!
This bond index soon recovered, because for the first time in its history, the Federal Reserve began monetizing corporate bonds in March 2020. As the FOMC’s books have never been publicly audited, we don’t know exactly which corporations’ bonds were “monetized” in March 2020. But to properly “stabilize” the corporate bond market, I suspect the idiots at the FOMC, funded with unlimited monetary inflation, became the sole buyers of corporate junk bonds, junk bonds no one using their own money would buy.
After the FOMC “stabilized” the corporate bond market in April 2020, the Dow Jones Corporate Bond Index broke above 475 in the next six months. If a picture is worth a thousand words, I’ll save you from reading a tedious description of what is so obviously displayed below, and simply say this bond index again attempted to break above 475 a year ago, but this summer, began going down. This week closed, with the Dow Jones Corporate Bond Index at 451.38.
I expect in the coming year, it will test the 365 it saw in October 2022. If we are in a bond bear market, it will close below that sometime in the not to distance future.
What can I say, but the bond market is in a mess. If Henry Ford is to be believed, as seen below, we’d be doing a lot better without a gaggle of idiots “managing monetary policy” at the FOMC.
“Inextinguishable debts?” Talk to the many college graduates with huge student loans, used to finance a worthless degree, for a job in a field with zero prospects of paying off their debts to the Federal Reserve System. Did you know student loans are not eligible for bankruptcy relief? “Inextinguishable debts!”
Now on to gold’s BEV chart. Gold’s last BEV Zero was last January. Following that, it saw its correction low in July, and bounced off of that low in August, to its BEV -15% line. Currently gold is holding on, just below its BEV -20% line.
What will gold do next; break below its lows of July, or above its rebound highs of August? Your guess is as good as mine. But I’m inclined to believe gold will soon break above its BEV -15% line below, on its way to a new all-time high, before 2026 concludes.
Gold, in its step sum table below, saw a 15-count of +7 in August, as it approached its BEV -15% line above. But a 15-count of +7 is an overbought market, and markets don’t like being overbought.
So, gold sold off some, as daily declines increased, until its 15-count became a -5 on September 16th. So, what is next? I don’t exactly know. But I suspect the next time gold’s 15-count becomes overbought with a +7, it will be trading at much higher prices.
The Dow Jones on its side of the step sum table, continues to be oversold, with multiple 15-counts of -7. Yet, as daily declines continue overwhelming daily advances, for only two days since August 21st, Wednesday & Thursday of this week, has the Dow Jones’ BEV closed below of scoring position. I’m impressed!
This week, I’ve pointed out lots of bearish developments in the bond market, that one day will impact the Dow Jones. But we know these bond market issues haven’t yet had their way with the stock market, by noting the Dow Jones daily volatility’s 200D M/A, remains very low, well below 1.00% in the table above, and chart below.
When Mr Bear comes to claim, what he believes to be rightfully his; your money in the stock market, we’ll know when he is getting serious, when we once again see large daily moves in the Dow Jones. Days where the Dow Jones closes in excess of +/-2% from their previous day’s closes – days of extreme volatility, the dreadful Dow Jones 2% days.
When these Dow Jones 2% days begin to be regular weekly occurrences, and worse, multiple weekly occurrences, watch the Dow Jones daily volatility’s 200D M/A in the chart above, rise up to, and then swiftly move above its 1.00% line, as the Dow Jones itself deflates to much lower valuations.
That it for this week. God willing, I’ll be back next week with more market commentary.
Mark J. Lundeen
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